How Does a Consumer Proposal Affect My Credit Rating?
When you file a consumer proposal, you are telling your creditors you can no longer make the required payments on what you owe them. And, yes, filing a consumer proposal will affect your credit rating – but there’s more to the story.
If you file a consumer proposal, your credit score will be negatively affected, just as it would be if you simply ceased to make your payments. Filing a consumer proposal will result in either an R7 or an R9 credit rating on your listed accounts.
However, keep in mind that if you’ve been experiencing financial stress, your credit score may already have been damaged by unpaid, late or delinquent accounts on your file.
The Meaning of Credit Reports
On Canadian credit reports (from Equifax and TransUnion), each credit account is assigned a credit score on a scale from R1 to R9. R1 is the best credit rating and R9 is the worst. The “R” stands for revolving credit – accounts that can carry a running balance, on which you are required to pay only a portion each month.
Here are the credit score meanings:
- R1 – You pay that credit account on time
- R2 – Your payments are 30 days late
- R3 – Your payments are 60 days late
- R4 – Your payments are 90 days late
- R5 – Your payments are 120 days late
- R6 – (typically not used)
- R7 – Typically used for consumer proposals, consolidation orders, or debt management plans (offered through a non-profit credit counsellor)
- R8 – Shows that a secured creditor has taken steps to realize on their security (e.g. repossessed your car); rarely appears on a credit report as after repossession the creditor typically initiates legal or collection action, which is rated R9
- R9 – Typically used when an account is placed for collection or considered un-collectible, or if you are bankrupt; R9 can also appear in consumer proposal
How Long Does a Consumer Proposal Stay on My Credit Report?
The Financial Consumer Agency of Canada states that Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed. So, for example, if your consumer proposal takes you four years to pay off, your score will be affected for seven years in total. If you are able to pay off your proposal quicker, your credit rating will improve in less time.
When you have completed your consumer proposal, your Trustee will mail you a “Certificate of Full Performance.” It is recommended that you send a copy of this document to TransUnion and Equifax, to make sure your credit record is updated as quickly as possible. They will process the new information as soon as they receive it.
Is the effect on my credit rating permanent?
Not at all. With careful use of new credit, your credit rating can be quite good 2-3 years after you complete your consumer proposal.
Tips for Credit Rebuilding
Ironically, the only way to fix your credit score is to start borrowing money again. If you are in a consumer proposal, think carefully about the purpose of this process, and how to avoid new problems with your credit. Even though it feels good to be offered new credit, or be accepted for a new card, be sure not to overextend your ability to make regular payments. Go slowly. You do not need to borrow large amounts to rebuild your credit. Making all your payments on time is the key.
Here are some tips for rebuilding your credit.
#1 – Set up a budget
If you have filed a consumer proposal, your Trustee will have put together an income and expense statement with you. It is important to know how much you are spending. The key to budgeting is to set aside money for your fixed and variable costs every month. You should also set aside least $1,000 for emergencies. Once you have this money put aside and your budget is working, you can begin credit rebuilding.
#2 – Establish Two or More New Lines Of Credit
There are two main types of credit available to consumers:
- Revolving Credit. Revolving credit is credit that is constantly available to use, and includes credit cards, lines of credit, and store cards. The credit unions update your payment history on these sources of credit every month.
- Installment Credit. Installment credit is defined as a payment arrangement with a lender over a set period of time. This type of credit includes mortgages, car loans, chattel loans and other types of loans. Installment credit can be pricey, as rates are based on your credit score.
An example of installment credit is a car loan, where the lender will approve a loan and record the car as collateral. The set payment of the loan will be reported to the credit bureau every month, and your credit score will begin to improve.
RRSP loans are also installment credit. Banks or lenders are often very approachable regarding these, as they get a good interest rate and their money is secure.
It is recommended that you open two or three credit accounts to rebuild your credit rating. Some sources state that at least one account should be instalment credit, but it is possible to rebuild your credit with credit cards alone – as long as your new payment history is perfect!
#3 – Keep Payments Current
Once you have done the hard work of establishing new credit and beginning to improve your credit rating, it is imperative that you keep all of your accounts up to date. This includes not only your credit card and loan payments, but also your utilities, cell phones, and any other accounts.
Can I Get Credit While in a Consumer Proposal?
You may wish to ask your Trustee about this. While in a consumer proposal, you can apply for a “secured” credit card through select financial institutions. With a secured card, you make a small security deposit, and then you can borrow money. Check the cost of the card, as service charges are greater than with standard cards. Also, do not confuse secured credit cards with “pre-paid” VISAs and MasterCards – the latter do not rebuild your credit.
Using a secured credit card and making regular payments on it while in consumer proposal can cause a slight improvement in your credit rating, but you will see quicker improvements once your consumer proposal is paid off. Also, you will have access to better interest rates on borrowed money after your consumer proposal is completed.
How much does it cost to check my credit report?
By law, Canada’s two credit bureaus must provide you with a free copy of any information about you they have collected from your creditors. However, this free version is only available if you request it by fax or by mail, and it is mailed out to you, which takes a little time. Alternatively, if you visit Equifax’s or Transunion’s website, you can pay for a quick version and see your current credit report. For a small extra payment, you can also see your aggregate credit score, which is a number between 300 and 800 (see this page from the Financial Consumer Agency of Canada for more information on credit scores).
Credit reports can be very informative. It is recommended that you get copies of your reports after you complete your consumer proposal, so you can see what is being reported and make sure the information is updated correctly.
Can I pay to fix my credit?
The short answer is no. As outlined above, fixing your score takes some effort, and some time. Some companies offer paid services to help you with the process, but you can get the same results yourself by following the steps above. You’ll soon be on your way to getting your credit report back in good shape.
As your credit improves, you will be allowed to borrow more money and get better interest rates. But be cautious about accepting credit increases: keep in mind that it was debt that caused your troubles in the first place!
Learn More About Consumer Proposal
A consumer proposal can be a good solution for many income-earning Canadians struggling to get out of debt. Each situation is different, so why not contact a Licensed Insolvency Trustee to arrange for a no-charge initial consultation to review all of your options.
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